Richard D Wyckoff’s main contribution to stock market analysis was in the study of volume. He felt that this was where professional interests left important clues that helped determine the future direction of the market.
In addition to analyzing volume and its relation to price spread, several Wyckoff tools have been developed, over the years, that help traders and investors zero in on good entry and exit points, when buying and selling stocks.
Originally called the Trend Barometer, today’s Wyckoff tools consist of the Optimism – Pessimism Index, the Force Index and the Technometer.
The Optimism – Pessimism Index (O-P Index) is a numerical representation of net up volume minus net down volume. The volume readings are taken from the intra-day waves of a stock or an index. While many volume indicators depend on the day’s final volume readings, the O-P Index drills down and pulls volume from those important intra-day waves.
The O-P Index number is not as important as is its relationship with the Wyckoff Wave. The O-P Index volume readings represent the amount of effort that has gone into moving the stock, either up or down. The results of that effort are shown in the price of the Wyckoff Wave. If a great deal of effort is put into moving a stock and that effort is not represented by the results, this is an early indication that the move may be in trouble.
Conversely, the same is true if the O-P Index is putting in little effort, but the Wyckoff Wave is showing stronger results.
The Force Index is designed to measure the amount of pressure on the market. In most cases it is a negative number. If the Force Index begins to record low levels, it is likely any rally would be relatively short or be coming to an end. The same is true on a reaction if the Force Index produces very low negative or positive readings.
The Technometer is designed to identify the degree in which a stock or an index is either overbought oversold. Overbought readings began at 50. Oversold readings began at 42. A stock or index is considered clearly oversold when the Technometer reading is at 38.
These important Wyckoff tools should work in harmony. If one is sending a signal that conflicts with the other two, it is a sign of uncertainty and the Wyckoff trader should exercise caution when entering or exiting the market.
Last Thursday, the Wyckoff Wave rallied on good price spread and volume. Its O-P Index was in short-term harmony with the Wyckoff Wave, when compared with point P. The Wyckoff Wave is also attempting to return to its short-term uptrend channel.
However, the Technometer was in a nearly overbought condition and the Force Index was putting in lower negative readings.
The price spread and volume was positive. The O-P Index was looking more positive. The Technometer was moving towards an overbought condition, which suggested the rally was coming to an end and the Wyckoff Wave would react.
Last Friday prodiced reduced price spread and volume and the Wyckoff Wave was unable to return to its upward trend channel. This suggested a lack of demand and was consistent with Thursday’s negative Technometer reading.
However, all of a sudden, the Technometer moved to a nearly oversold condition. In addition, the O-P Index reacted and moved into a short-term negative divergence with the Wyckoff Wave. Was the Wyckoff Wave going to continue to rally through the top of the trading range? The price spread and volume suggested a lack of demand. The O-P Index was sending negative signals. However, the Technometer was moving towards an oversold condition. These mixed signals suggested Wyckoff traders watch the market and wait for further clarification.
On Monday, the Wyckoff Wave rallied again on reduced price spread and volume. Its short-term negative divergence with the O-P Index remained. The Force Index began to put in moderately negative readings. However, the Technometer was in a low neutral condition and moving towards oversold.
In addition, once again, the Wyckoff Wave was unable to return to its short-term uptrend channel. This lack of demand at the top of the trading range and the negative signals from the O-P Index were consistent with a reaction back into the trading range. The Technometer was sending a different signal.
With the exception of the Technometer readings, it appeared the Wyckoff Wave was prepared to react. However, the fact that all the Wyckoff tools were not sending the same signal was a sign of caution. This may not have been the best place to take new short-term positions to the downside.
The Technometer’s signals were enhanced on Wednesday, when the Technometer moved into an oversold condition. The Wyckoff Wave reacted on slightly increased price spread and volume. This suggested supply was present, but not in an overpowering manner.
As the Wyckoff Wave was unable to return to its upward trend channel, the short-term trend of the market was change from up to neutral.
Despite all this, the Wyckoff tools continue to send conflicting signals. Thursday brought some answers and perhaps some clarity.
The Wyckoff Wave experienced a wide gap opening to the downside. There, it encountered some demand and rallied for the rest of the trading day. The rally quality was reasonable, but not dominant.
The O-P Index returned to a short-term negative divergence, when compared to the Wyckoff Wave at point R. The Force Index continue to produce moderately negative readings.
However, suddenly the Technometer moved into a solidly neutral condition and appeared ready to become overbought, if the Wyckoff Wave continued to rally.
Was the Wyckoff Wave going to rally and test the high at point R? If it did that, and the Technometer moved into an overbought condition, the Wyckoff tools would be back in harmony. This, along with a successful test of Monday’s high, could be the beginning of a reaction back into the trading range. Word the Wyckoff tools sending a signal that we should wait for a successful secondary test?
If that scenario plays out, patience in using the Wyckoff tools might well a provided an excellent opportunity to take new positions to the downside.
My sincere best wishes to each one of you and your families for a blessed and joyous Easter